Fair value is the exchange price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value definition focuses on an exit price versus the acquisition cost. Fair value measurements use market data or assumptions market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs may be readily observable, corroborated by market data or generally unobservable. Valuation techniques maximize the use of observable inputs and minimize use of unobservable inputs. A midmarket pricing convention (the midpoint price between bid and ask prices) is permitted for use as a practical expedient.

Fair value measurements are classified in three levels based on the fair value hierarchy as defined by GAAP. Certain investments are not categorized within the fair value hierarchy. These investments are measured at fair value using the NAV per share practical expedient. The NAV is derived based on the investment cost, less any impairment, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

Fair value accounting guidance permits entities to elect to measure certain financial instruments that are not required to be accounted for at fair value, such as equity method investments or the company’s own debt, at fair value. The Duke Energy Registrants have not elected to record any of these items at fair value.

Transfers between levels represent assets or liabilities that were previously (i) categorized at a higher level for which the inputs to the estimate became less observable or (ii) classified at a lower level for which the inputs became more observable during the period. The Duke Energy Registrant’s policy is to recognize transfers between levels of the fair value hierarchy at the end of the period. There were no transfers between levels during the six months ended June 30, 2019, and 2018.

The majority of investments in equity securities are valued using Level 1 measurements. Investments in equity securities are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as the New York Stock Exchange and Nasdaq Stock Market. Foreign equity prices are translated from their trading currency using the currency exchange rate in effect at the close of the principal active market. There was no after-hours market activity that was required to be reflected in the reported fair value measurements.

Most investments in debt securities are valued using Level 2 measurements because the valuations use interest rate curves and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate) and consider the counterparty credit rating. If the market for a particular fixed-income security is relatively inactive or illiquid, the measurement is Level 3.

Commodity derivatives with clearinghouses are classified as Level 1. Other commodity derivatives, including Piedmont's natural gas supply contracts, are primarily valued using internally developed discounted cash flow models that incorporate forward price, adjustments for liquidity (bid-ask spread) and credit or non-performance risk (after reflecting credit enhancements such as collateral), and are discounted to present value. Pricing inputs are derived from published exchange transaction prices and other observable data sources. In the absence of an active market, the last available price may be used. If forward price curves are not observable for the full term of the contract and the unobservable period had more than an insignificant impact on the valuation, the commodity derivative is classified as Level 3. In isolation, increases (decreases) in natural gas forward prices result in favorable (unfavorable) fair value adjustments for natural gas purchase contracts; and increases (decreases) in electricity forward prices result in unfavorable (favorable) fair value adjustments for electricity sales contracts. Duke Energy regularly evaluates and validates pricing inputs used to estimate the fair value of natural gas commodity contracts by a market participant price verification procedure. This procedure provides a comparison of internal forward commodity curves to market participant generated curves.

Most over-the-counter interest rate contract derivatives are valued using financial models that utilize observable inputs for similar instruments and are classified as Level 2. Inputs include forward interest rate curves, notional amounts, interest rates and credit quality of the counterparties.

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets. Derivative amounts in the tables below for all Duke Energy Registrants exclude cash collateral, which is disclosed in Note 10. See Note 11 for additional information related to investments by major security type for the Duke Energy Registrants.



	June 30, 2019
(in millions)	Total Fair Value			Level 1			Level 2			Level 3			Not Categorized
NDTF equity securities	$	5,178		$	5,119		$	—		$	—		$	59
NDTF debt securities	2,425			870			1,555			—			—
Other equity securities	112			112			—			—			—
Other debt securities	315			99			216			—			—
Derivative assets	38			3			—			35			—
Total assets	8,068			6,203			1,771			35			59
Derivative liabilities	(342		)	(12		)	(216		)	(114		)	—
Net assets (liabilities)	$	7,726		$	6,191		$	1,555		$	(79	)	$	59



	December 31, 2018
(in millions)	Total Fair Value			Level 1			Level 2			Level 3			Not Categorized
NDTF equity securities	$	4,475		$	4,410		$	—		$	—		$	65
NDTF debt securities	2,231			576			1,655			—			—
Other equity securities	99			99			—			—			—
Other debt securities	270			67			203			—			—
Derivative assets	57			4			25			28			—
Total assets	7,132			5,156			1,883			28			65
Derivative liabilities	(242		)	(11		)	(90		)	(141		)	—
Net assets (liabilities)	$	6,890		$	5,145		$	1,793		$	(113	)	$	65

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Balance at beginning of period	$	(115	)	$	(124	)	$	(113	)	$	(114	)
Purchases, sales, issuances and settlements:
Purchases	38			56			38			56
Settlements	(11		)	(15		)	(23		)	(29		)
Total gains (losses) included on the Condensed Consolidated Balance Sheet	9			(14		)	19			(10		)
Balance at end of period	$	(79	)	$	(97	)	$	(79	)	$	(97	)